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Central European currencies extended losses on Tuesday on concerns that a bailout for debt-choked Spanish banks will not stem the euro zone crisis, but debt markets held steady with Polish 10-year yields keeping near a 3-1/2-year low.
The currency losses, which wiped out gains from the previous day, kept volatility high in the region, as traders expected, ahead of a Greek election at the weekend that could decide the indebted country's future in or out of the euro zone.
The euro zone debt crisis weighs heavily on central European economies because of their close trading, banking and financial links to the currency bloc.
"The crisis in the euro-zone continues to cast a long shadow over the outlook for emerging Europe," Capital Economics said in a research note.
"Our expectation remains that growth in pretty much every country will disappoint over the next year or so, and financial markets will fall further before staging a recovery in 2013."
Emerging European currencies have lost around 4 percent since May 1 and stock indices are down 3-15 percent, although debt markets have remained robust.
This was seen in Poland's ability to attract strong demand and sell 1.5 billion euros in 10-year bonds on Monday as part of an aggressive borrowing drive seen in the country and neighbors the Czech Republic and Slovakia in the first half of the year.
With more than 70 percent of 2012 borrowing targets already reached in those countries, dealers said dwindling supply later this year could support local markets.
"I think Polish (domestic) 10-year bonds have the potential to strengthen further, as there will be more inflows to emerging market bond funds," said Maciej Popiel, a bond trader at PKO BP.
"Poland attracts funds that used to invest in Portugal, Ireland, Greece, etc. There are not many assets in Europe with such a yield and relatively good credit standing."
Yields on 10-year paper rose 4 basis points to 5.32 percent on profit-taking earlier on Tuesday, but remained around 6 basis points from a nearly 3-1/2-year low. By 0905 EDT, the zloty lost 0.4 percent to 4.326 against the euro.
Hungary's forint fell 0.3 percent, off morning highs hit after data showed inflation slowed to 5.3 percent in May from 5.7 percent in April, indicating a stabilizing economic environment.
Interest rate swaps moved lower after the data and forward rate agreements now price in a quarter point cut in the central bank's hawkish 7 percent base rate for the next six months, one Budapest-based fixed income trader said. Bond yields were flat, except for 10-year paper which fell slightly.
Hungary also easily sold three-month paper on Tuesday, but continued to pay a yield above 7 percent, reinforcing the view Budapest needs a credit line from the International Monetary Fund and European Union to ease borrowing costs.
cnbc
The currency losses, which wiped out gains from the previous day, kept volatility high in the region, as traders expected, ahead of a Greek election at the weekend that could decide the indebted country's future in or out of the euro zone.
The euro zone debt crisis weighs heavily on central European economies because of their close trading, banking and financial links to the currency bloc.
"The crisis in the euro-zone continues to cast a long shadow over the outlook for emerging Europe," Capital Economics said in a research note.
"Our expectation remains that growth in pretty much every country will disappoint over the next year or so, and financial markets will fall further before staging a recovery in 2013."
Emerging European currencies have lost around 4 percent since May 1 and stock indices are down 3-15 percent, although debt markets have remained robust.
This was seen in Poland's ability to attract strong demand and sell 1.5 billion euros in 10-year bonds on Monday as part of an aggressive borrowing drive seen in the country and neighbors the Czech Republic and Slovakia in the first half of the year.
With more than 70 percent of 2012 borrowing targets already reached in those countries, dealers said dwindling supply later this year could support local markets.
"I think Polish (domestic) 10-year bonds have the potential to strengthen further, as there will be more inflows to emerging market bond funds," said Maciej Popiel, a bond trader at PKO BP.
"Poland attracts funds that used to invest in Portugal, Ireland, Greece, etc. There are not many assets in Europe with such a yield and relatively good credit standing."
Yields on 10-year paper rose 4 basis points to 5.32 percent on profit-taking earlier on Tuesday, but remained around 6 basis points from a nearly 3-1/2-year low. By 0905 EDT, the zloty lost 0.4 percent to 4.326 against the euro.
Hungary's forint fell 0.3 percent, off morning highs hit after data showed inflation slowed to 5.3 percent in May from 5.7 percent in April, indicating a stabilizing economic environment.
Interest rate swaps moved lower after the data and forward rate agreements now price in a quarter point cut in the central bank's hawkish 7 percent base rate for the next six months, one Budapest-based fixed income trader said. Bond yields were flat, except for 10-year paper which fell slightly.
Hungary also easily sold three-month paper on Tuesday, but continued to pay a yield above 7 percent, reinforcing the view Budapest needs a credit line from the International Monetary Fund and European Union to ease borrowing costs.
cnbc
